World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Wednesday, July 29, 2009

As I’ve been mentioning in my reports on the flow of Treasury International Capital (TIC Flows), foreigners have been net sellers of our debt. This last report, released July 16th, shows a net outflow of foreign private capital of $82.2 billion and the outflow of foreign official flows were $15.6 billion.

July 16 (Bloomberg) -- International demand for long-term U.S. financial assets weakened in May as investors sold the most Treasury notes and bonds in six months.

Total net sales of long-term equities, notes and bonds were $19.8 billion in May, compared with net purchases of $11.5 billion a month earlier, the Treasury said today in Washington. Net selling of government notes and bonds totaled $22.6 billion, the most since sales of $25.8 billion in November, after net buying of $42 billion in April.

As investors abroad dumped long-term Treasuries, purchases of U.S. stocks in May were the strongest pace since January 2008. The Obama administration is selling a record amount of government debt to finance a budget deficit that’s projected to approach $2 trillion this year, raising concern about American fiscal policy and spurring purchases of shorter-term U.S. debt.

Meanwhile the Fed is issuing $150 to $235 billion in new debt each and every week. Granted, long bonds, as measured by TLT, are down 24% ytd, yet bonds have yet to really fall off the edge as far as price or to shoot the moon in terms of interest yield.

What we’ve been noticing is that the amount of money at each auction is increasing from the Primary Dealers who are surrogates of the Fed. And, in fact, when we look at the chart from the Fed showing the amount of U.S. Government Securities at all Commercial Banks, we do see a parabolic rise and a steady increase up to the latest $1.3 Trillion mark:

Now, as much as $1.3 trillion is, in the last two years this amount appears to have “only” grown by about $200 billion total. So I’ll ask the question again; WHERE’S THE MONEY COMING FROM?

Net withdrawals from foreigners (most recent data unknown), and roughly $200 billion increase in the past couple years at commercial banks which would include the primary dealers. It’s being suggested that the Primary Dealers are simply going to borrow the money from the Fed, turning around and lending it back to them at a higher rate while skimming the difference. If that is true, and it probably is, then it’s going to end very badly when that circle is broken.

I say again, it’s time to audit the Fed, the Treasury, and the Primary Dealers by an INDEPENDENT AUDITOR, if such an animal can be found.